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Microeconomics 6th Edition Hubbard Solutions Manual 1
Microeconomics 6th Edition Hubbard Solutions Manual 1
Microeconomics 6th Edition Hubbard Solutions Manual 1
▪ A negative externality is a cost that affects someone not directly involved in the production
or consumption of a good or service.
▪ A positive externality is a benefit that affects someone not directly involved in the
production or consumption of a good or service.
▪ If transactions costs are low, private bargaining can result in efficient solutions to
externality problems.
▪ When private solutions to externalities are not feasible, government intervention in the
form of a tax (negative externality) or subsidy (positive externality) can bring about an
efficient level of output.
▪ The four categories of goods are private, public, quasi-public, and common resources.
Key Terms
Coase theorem, p. 156. The argument of Private benefit, p. 149. The benefit received by
economist Ronald Coase that if transactions the consumer of a good or service.
costs are low, private bargaining will result in an
efficient solution to the problem of externalities. Private cost, p. 149. The cost borne by the
producer of a good or service.
Command-and-control approach, p. 163. A
policy that involves the government imposing Private good, p. 166. A good that is both rival
quantitative limits on the amount of pollution and excludable.
firms are allowed to emit or requiring firms to Property rights, p. 151. The rights individuals
install specific pollution control devices. or businesses have to the exclusive use of their
property, including the right to buy or sell it.
Common resource, p. 166. A good that is rival
but not excludable. Public good, p. 166. A good that is both
nonrival and nonexcludable.
Excludability, p. 165. The situation in which
anyone who does not pay for a good cannot Rivalry, p. 165. The situation that occurs when
consume it. one person’s consumption of a unit of a good
means no one else can consume it.
Externality, p. 148. A benefit or cost that affects
someone who is not directly involved in the Social benefit, p. 149. The total benefit from
production or consumption of a good or service. consuming a good or service, including both
the private benefit and any external benefit.
Free riding, p. 166. Benefiting from a good
without paying for it. Social cost, p. 149. The total cost of producing a
good or service, including both the private cost
Market failure, p. 151. A situation in which the and any external cost.
market fails to produce the efficient level of
output. Tragedy of the commons, p. 171. The tendency
for a common resource to be overused.
Pigovian taxes and subsidies, p. 163.
Government taxes and subsidies intended to Transactions costs, p. 156. The costs in time
bring about an efficient level of output in the and other resources that parties incur in the
presence of externalities. process of agreeing to and carrying out an
exchange of goods or services.
Chapter Outline
Can Economic Policy Help Protect the Environment?
Most scientists believe burning fossil fuels generates greenhouse gases that can increase global warming.
Public opinion polls show that a majority of people believe the government should regulate greenhouse
gases. Most economists agree, but disagree with the public about which government policies would be best.
Many economists endorse market-based policies that rely on incentives rather than administrative rules. A
carbon tax is an example of a market-based policy. Some businesses oppose the carbon tax because they
believe it would raise their costs of production. Other businesses believe a carbon tax would be less costly
and more effective than other government policies.
Teaching Tips
Industrial pollution is often cited as an example of a negative externality, but you can also use smoking as
a classroom example. Most college students grew up in an era where smoking was much less socially
acceptable than when their parents and grandparents were young. Students are often stunned to learn that
smoking—by both students and instructors—was allowed in many college classrooms as late as the 1970s.
Although few, if any, colleges allow smoking in classroom buildings now, many bars and restaurants have
smoking sections. Ask your students (a) if they would be willing to pay smokers to not smoke while they
are in the same restaurant, or (b) if they have ever chosen to sit in a restaurant’s smoking section to avoid a
longer wait for a table in a non-smoking section.
Draw a graph illustrating the externality associated with smoking in Ike’s Bar-B-Q Pit and explain how this
externality causes a deviation from economic efficiency in this market.
Solving the Problem
Step 1: Review the chapter material.
This problem is about externalities, so you may want to review the section “Externalities and
Economic Efficiency,” which begins on page 148 of the textbook.
Step 3: Describe how the externality causes a deviation from economic efficiency.
The economically efficient outcome is for the quantity of meals served at Ike’s restaurant to be
Q2 and the price of the meals to be P2. (Ike’s, no doubt, has a varied menu with different meals
with different prices. To simplify this problem, assume P2 is an average meal price.) This
outcome would be economically efficient because it is where the market supply curve that
represents social costs, including the negative health effects on non-smokers, crosses the
demand curve. At this point, the marginal benefit from Ike’s meals would equal the marginal
social cost. However, because neither Ike nor his smoking patrons have to pay for the negative
externality, the market supply curve represents only private costs. As a result, the equilibrium
market price and quantity are P1 and Q1. At this point, the marginal social cost from Ike’s meals
exceeds the marginal benefit.
Extra Making
the The Fable of the Bees
Connection
Apple trees must be pollinated by bees to bear fruit. Bees need the nectar from apple trees (or other plants)
to produce honey. James Meade, winner of the 1977 Nobel Prize in Economics, argued that there were
positive externalities in both apple growing and beekeeping. The more apple trees growers planted, the
more honey would be produced. And the more hives beekeepers kept, the larger the apple crops in
neighboring apple orchards. Steven Cheung of the University of Washington showed that government
intervention was not needed to increase economic efficiency in the markets for apples and honey because
beekeepers and apple growers had long since arrived at private agreements. In other words, a “Coase
solution” to the problem of positive externalities had been reached.
Today, honeybees pollinate more than $14 billion worth of crops annually nationwide. About 1.6 million
beehives are required to pollinate the California almond crop. Beehives are shipped into the state in
February and March to pollinate the almond trees, and then they are shipped to Oregon and Washington to
pollinate cherry, pear, and apple orchards during April and May. But North American beekeepers have
suffered the loss of over 10 million beehives since 2007 from what scientists refer to “colony collapse
disorder.” Researchers from the Harvard School of Public Health recently have found evidence that colony
collapse disorder may be due to exposure to a class of widely used insecticides. Harvard researcher
Chensheng Lu believes that future research “…could help elucidate the biological mechanism responsible
[for the disorder]… Hopefully we can reverse the continuing trend of honey bee loss.” While some scientists
have called for restricting or banning the use of the insecticides responsible for the problem other scientists
are attempting to develop almond trees that require fewer bees to pollinate and a private company is
attempting to commercialize a “blue orchard bee” that is stingless and works at colder temperatures than
the honeybee.
Sources: James E. Meade, “External Economies and Diseconomies in a Competitive Situation,” Economic Journal, Vol. 62, March
1952, pp. 54–67; Steven N. S. Cheung, “The Fable of the Bees: An Economic Investigation,” Journal of Law and Economics, Vol. 16,
No. 1, April 1973, pp. 11–33; Eric Mack, “The Cause of Colony Collapse Disorder, Disappearing Bees Becoming More Clear,” Forbes,
May 12, 2014. Wendy Lyons Sunshine, “Is Life Too Hard for Honeybees?” Scientific American, March 31, 2009; and Jeff Nesbit,
“Bee Colony Collapses Are More Complex Than We Thought,” US News & World Report, August 7, 2013.
Question
We know that owners of apple orchards and beehives are able to negotiate private agreements. Is it likely
that as a result of these private agreements, the market supplies the efficient quantities of apple trees and
beehives? Are there any real-world difficulties that might stand in the way of achieving this efficient
outcome?
Answer
It seems likely that private agreements will result in something close to the efficient quantities of apple
trees and beehives. We know that private agreements are detailed and enforceable, so it is likely that the
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[37] The above Letter was written in the winter of 1838, and by the Secretary at War’s
Report, a year and a half ago, it is seen that 36,000,000 of dollars had been already
expended in the Seminolee war, as well as the lives of 12 or 1400 officers and men,
and defenceless inhabitants, who have fallen victims to the violence of the enraged
savages and diseases of the climate. And at the present date, August, 1841, I see by
the American papers, that the war is being prosecuted at this time with its wonted
vigour; and that the best troops in our country, and the lives of our most valued
officers are yet jeopardised in the deadly swamps of Florida, with little more certainty
of a speedy termination of the war, than there appeared five years ago.
The world will pardon me for saying no more of this inglorious war, for it will be
seen that I am too near the end of my book, to afford it the requisite space; and as an
American citizen, I would pray, amongst thousands of others, that all books yet to be
made, might have as good an excuse for leaving it out.
[38] This veteran old warrior died a few weeks after I painted his portrait, whilst on
his way, with the rest of the prisoners, to the Arkansas.
[39] This remarkably fine boy, by the name of Os-ce-o-la Nick-a-no-chee, has recently
been brought from America to London, by Dr. Welch, an Englishman, who has been
for several years residing in Florida. The boy it seems, was captured by the United
States troops, at the age of six years: but how my friend the Doctor got possession of
him, and leave to bring him away I never have heard. He is acting a very praiseworthy
part however, by the paternal fondness he evinces for the child, and fairly proves, by
the very great pains he is taking with his education. The doctor has published recently,
a very neat volume, containing the boy’s history; and also a much fuller account of
Os-ce-o-la, and incidents of the Florida war, to which I would refer the reader.
[40] From accounts which left Fort Moultrie a few days after I returned home, it
seems, that this ill-fated warrior died, a prisoner, the next morning after I left him.
And the following very interesting account of his last moments, was furnished me by
Dr. Weedon, the surgeon who was by him, with the officers of the garrison, at Os-ce-
o-la’s request.
“About half an hour before he died, he seemed to be sensible that he was dying; and
although he could not speak, he signified by signs that he wished me to send for the
chiefs and for the officers of the post, whom I called in. He made signs to his wives
(of whom he had two, and also two fine little children by his side,) to go and bring his
full dress, which he wore in time of war; which having been brought in, he rose up in
his bed, which was on the floor, and put on his shirt, his leggings and moccasins—
girded on his war-belt—his bullet-pouch and powder-horn, and laid his knife by the
side of him on the floor. He then called for his red paint, and his looking-glass, which
was held before him, when he deliberately painted one half of his face, his neck and
his throat—his wrists—the backs of his hands, and the handle of his knife, red with
vermilion; a custom practiced when the irrevocable oath of war and destruction is
taken. His knife he then placed in its sheath, under his belt; and he carefully arranged
his turban on his head, and his three ostrich plumes that he was in the habit of wearing
in it. Being thus prepared in full dress, he laid down a few minutes to recover strength
sufficient, when he rose up as before, and with most benignant and pleasing smiles,
extended his hand to me and to all of the officers and chiefs that were around him; and
shook hands with us all in dead silence; and also with his wives and his little children;
he made a signal for them to lower him down upon his bed, which was done, and he
then slowly drew from his war-belt, his scalping-knife, which he firmly grasped in his
right hand, laying it across the other, on his breast, and in a moment smiled away his
last breath, without a struggle or a groan.”
LETTER—No. 58.
NORTH WESTERN FRONTIER.
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On an occasion when I had interrogated a Sioux chief, on the Upper
Missouri, about their Government—their punishments and tortures of
prisoners, for which I had freely condemned them for the cruelty of the
practice, he took occasion when I had got through, to ask me some
questions relative to modes in the civilized world, which, with his
comments upon them, were nearly as follow; and struck me, as I think
they must every one, with great force.
“Among white people, nobody ever take your wife—take your
children—take your mother, cut off nose—cut eyes out—burn to death?”
No! “Then you no cut off nose—you no cut out eyes—you no burn to
death—very good.”
He also told me he had often heard that white people hung their
criminals by the neck and choked them to death like dogs, and those their
own people; to which I answered, “yes.” He then told me he had learned
that they shut each other up in prisons, where they keep them a great part
of their lives because they can’t pay money! I replied in the affirmative to
this, which occasioned great surprise and excessive laughter, even
amongst the women. He told me that he had been to our Fort, at Council
Bluffs, where we had a great many warriors and braves, and he saw three
of them taken out on the prairies and tied to a post and whipped almost
to death, and he had been told that they submit to all this to get a little
money, “yes.” He said he had been told, that when all the white people
were born, their white medicine-men had to stand by and look on—that
in the Indian country the women would not allow that—they would be
ashamed—that he had been along the Frontier, and a good deal amongst
the white people, and he had seen them whip their little children—a
thing that is very cruel—he had heard also, from several white medicine-
men, that the Great Spirit of the white people was the child of a white
woman, and that he was at last put to death by the white people! This
seemed to be a thing that he had not been able to comprehend, and he
concluded by saying, “the Indians’ Great Spirit got no mother—the
Indians no kill him, he never die.” He put me a chapter of other
questions, as to the trespasses of the white people on their lands—their
continual corruption of the morals of their women—and digging open
the Indians’ graves to get their bones, &c. To all of which I was
compelled to reply in the affirmative, and quite glad to close my note-
book, and quietly to escape from the throng that had collected around
me, and saying (though to myself and silently), that these and an hundred
other vices belong to the civilized world, and are practiced upon (but
certainly, in no instance, reciprocated by) the “cruel and relentless
savage.”
Of their modes of war, of which, a great deal has been written by other
travellers—I could say much, but in the present place, must be brief. All
wars, offensive or defensive, are decided on by the chiefs and doctors in
council, where majority decides all questions. After their resolve, the
chief conducts and leads—his pipe with the reddened stem is sent
through the tribe by his runners, and every man who consents to go to
war, draws the smoke once through its stem; he is then a volunteer, like
all of their soldiers in war, and bound by no compulsive power, except
that of pride, and dread of the disgrace of turning back. After the soldiers
are enlisted, the war-dance is performed in presence of the whole tribe;
when each warrior in warrior’s dress, with weapons in hand, dances up
separately, and striking the reddened post, thereby takes the solemn oath
not to desert his party.
The chief leads in full dress to make himself as conspicuous a mark as
possible for his enemy; whilst his men are chiefly denuded, and their
limbs and faces covered with red earth or vermilion, and oftentimes with
charcoal and grease, so as completely to disguise them, even from the
knowledge of many of their intimate friends.
At the close of hostilities, the two parties are often brought together by
a flag of truce, where they sit in Treaty, and solemnize by smoking
through the calumet or pipe of peace, as I have before described; and
after that, their warriors and braves step forward, with the pipe of peace
in the left hand, and the war-club in the right, and dance around in a
circle—going through many curious and exceedingly picturesque
evolutions in the “pipe of peace dance.”
To each other I have found these people kind and honourable, and
endowed with every feeling of parental, of filial, and conjugal affection,
that is met in more enlightened communities. I have found them moral
and religious: and I am bound to give them great credit for their zeal,
which is often exhibited in their modes of worship, however insufficient
they may seem to us, or may be in the estimation of the Great Spirit.
I have heard it said by some very good men, and some who have even
been preaching the Christian religion amongst them, that they have no
religion—that all their zeal in their worship of the Great Spirit was but
the foolish excess of ignorant superstition—that their humble devotions
and supplications to the Sun and the Moon, where many of them suppose
that the Great Spirit resides, were but the absurd rantings of idolatry. To
such opinions as these I never yet gave answer, nor drew other instant
inferences from them, than, that from the bottom of my heart, I pitied the
persons who gave them.
I fearlessly assert to the world, (and I defy contradiction,) that the
North American Indian is everywhere, in his native state, a highly moral
and religious being, endowed by his Maker, with an intuitive knowledge
of some great Author of his being, and the Universe; in dread of whose
displeasure he constantly lives, with the apprehension before him, of a